Continuing the tax exemption for non-resident rig operators for a further five years

(Clause 9)

Summary of proposed amendment

Section CW 57 of the Act provides a tax exemption for income derived by a non-resident company from oil and gas exploration in an offshore permit area. The current exemption expires on 31 December 2009. The bill extends the exemption for a further five years, until 31 December 2014 to mitigate the additional costs and delays that could occur in the absence of the exemption and to provide companies with a degree of long-term certainty.

Application date

The amendment applies retrospectively. This means the tax exemption will apply to income derived from oil and gas exploration in an offshore permit area between the beginning of the non-resident company’s 2005–06 income year and the 31 December 2014.

Background

In May 2009 the Minister of Revenue and the Minister of Energy and Resources announced that as part of Budget 2009 the existing tax exemption for offshore oil and gas exploration due to expire on 31 December 2009 would be extended for five more years until 31 December 2014.

The exemption was introduced in 2004 because the 183-day rule for having a permanent establishment was having a negative impact on longer-term exploration programmes in New Zealand waters.

Before the exemption, non-resident offshore rig operators and seismic vessels had tended to stay in New Zealand for a period of less than 183 days (so as to not create a permanent establishment), even if further exploration had been desirable beyond the 183-day window. In some cases a different rig was mobilised to complete the exploration programme. This added to the costs of exploration and introduced delays to exploration drilling and any subsequent discovery of new oil or gas.

Extending the exemption for a further five years will provide companies planning exploration programmes with the certainty they require to commit to further long-term exploration.